Chapter 11 Property, Plant, and Equipment and Intangible Assets…contabilidad.uprrp.edu/wp-content/uploads/2018/04/Spiceland_9e_CH... · allocating the cost of property, plant, and

Solutions Manual, Vol.1, Chapter 11 11–1

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Question 11–1 The terms depreciation, depletion, and amortization all refer to the process of

allocating the cost of property, plant, and equipment and finite-life intangible assets to periods of use. The only difference between the terms is that they refer to different types of these long-lived assets; depreciation for plant and equipment, depletion for natural resources, and amortization for intangibles.

Question 11–2 The term depreciation often is confused with a decline in value or worth of an

asset. Depreciation is not measured as a decline in value from one period to the next. Instead, it involves the distribution of the cost of an asset, less any anticipated residual value, over the asset's estimated useful life in a systematic and rational manner that attempts to match revenues with the use of the asset.

Question 11–3 The process of cost allocation for plant and equipment and finite-life intangible

assets requires that three factors be established at the time the asset is put into use. These factors are: 1. Service (useful) life—The estimated use that the company expects to receive from

the asset. 2. Allocation base—The cost of the asset expected to be consumed during its service

life. 3. Allocation method—The pattern in which the allocation base is expected to be

consumed.

Question 11–4 Physical life provides the upper bound for service life. Physical life will vary

according to the purpose for which the asset is acquired and the environment in which it is operated. Service life may be less than physical life for several reasons. For example, the expected rate of technological changes may shorten service life. Management intent also may shorten the period of an asset’s usefulness below its physical life. For instance, a company may have a policy of using its delivery trucks for a three-year period before trading the trucks for new models.

Chapter 11 Property, Plant, and Equipment and

Intangible Assets: Utilization and Disposition

QUESTIONS FOR REVIEW OF KEY TOPICS

11–2 Intermediate Accounting, 9/e




Answers to Questions (continued)

Question 11–5 The total amount of depreciation to be recorded during an asset’s service life is

called its depreciable base. This amount is the difference between the initial value of the asset at its acquisition (its cost) and its residual value. Residual or salvage value is the amount the company expects to receive for the asset at the end of its service life less any anticipated disposal costs.

Question 11–6 Activity-based allocation methods estimate service life in terms of some measure

of productivity. Periodic depreciation or depletion is then determined based on the actual productivity generated by the asset during the period. Time-based allocation methods estimate service life in years. Periodic depreciation or amortization is then determined based on the passage of time.

Question 11–7 The straight-line depreciation method allocates an equal amount of depreciable

base to each year of an asset’s service life. Accelerated depreciation methods allocate higher portions of depreciable base to the early years of the asset’s life and lower amounts of depreciable base to later years. Total depreciation is the same by either approach.

Question 11–8 Conceptually, the use of activity-based depreciation methods would provide a

better relation between revenues and expenses. Clearly, the productivity of a plant asset is more closely associated with the benefits provided by that asset than the mere passage of time. However, activity-based methods quite often are either infeasible or too costly to use. For example, buildings do not have an identifiable measure of productivity. For assets such as machinery, there may be an identifiable measure of productivity, such as machine-hours or units produced, but it is more costly to determine the amount each period than it is to simply measure the passage of time. For these reasons, most companies use time-based depreciation methods.




Question 11–9 Companies might use the straight-line method because they consider that the

benefits derived from the majority of plant assets are realized approximately evenly over these assets’ useful lives. It also is the easiest method to understand and apply. The effect on net income also could explain why so many companies prefer the straight-line method to the accelerated methods. Straight line produces a higher net income in the early years of an asset’s life. Net income can affect bonuses paid to management or debt agreements with lenders. Income taxes are not a factor in determining the depreciation method because a company is not required to use the same depreciation method for both financial reporting and income tax purposes.

Question 10–10 Property, plant, and equipment may be disposed of by sale or retirement or

abandonment. When an item of property, plant, and equipment is sold, a gain or loss is recognized for the difference between the consideration received and the asset’s book value. Retirements and abandonments are handled in a similar fashion. The only difference is that there will be no monetary consideration received so there will be a loss if the asset is not fully depreciated. A loss is recorded for the remaining book value of the asset.

Question 11–11 The group approach to aggregation is applied to a collection of depreciable

assets that share similar service lives and other attributes. For example, group depreciation could be used for fleets of vehicles or collections of machinery. The composite approach to aggregation is applied to dissimilar operating assets, such as all of the depreciable assets in one manufacturing plant. Individual assets in the composite may have diverse service lives. Both approaches are similar in that they involve applying a single straight-line rate based on the average service lives of the assets in the group or composite.

Question 11–12 The allocation of the cost of a natural resource to periods of use is called

depletion. The process otherwise is identical to depreciation. The activity-based units-of-production method is the predominant method used to calculate depletion, not the time-based straight-line method.




Question 11–13 The amortization of finite-life intangible assets is based on the same concepts as

depreciation and depletion. The capitalized cost of an intangible asset that has a finite useful life must be allocated to the periods the company expects the asset to contribute to its revenue-generating activities. Intangibles, though, generally have no residual values, so the amortizable base is simply cost. Also, intangibles possess no physical life to provide an upper bound to service life. However, most intangibles have a legal or contractual life that limits useful life. Intangible assets that have indefinite useful lives, including goodwill, are not amortized.

Question 11–14 A company can calculate depreciation based on the actual number of days or

months the asset was used during the year. A common simplifying convention is to record one-half of a full year’s expense in the years of acquisition and disposal. This is known as the half-year convention. The modified half-year convention records a full year’s expense when the asset is acquired in the first half of the year or sold in the second half. No expense is recorded when the asset is acquired in the second half of the year or sold in the first half.

Question 11–15 A change in the service life of plant and equipment and finite-life intangible

assets is accounted for as a change in an estimate. The change is accounted for prospectively by simply depreciating the remaining depreciable base of the asset (book value at date of change less estimated residual value) over the revised remaining service life.




Question 11–16 A change in depreciation method is accounted for prospectively by simply

depreciating the remaining depreciable base of the asset (book value at date of change less estimated residual value) over the remaining service life using the new depreciation method, exactly as we would account for a change in estimate. One difference is that most changes in estimate do not require a company to justify the change. However, this change in estimate is a result of changing an accounting principle and therefore requires a clear justification as to why the new method is preferable. A disclosure note reports the effect of the change on net income and earnings per share along with clear justification for changing depreciation methods.

Question 11–17 If a material error is discovered in an accounting period subsequent to the period

in which the error is made, previous years’ financial statements that were incorrect as a result of the error are retrospectively restated to reflect the correction. Any account balances that are incorrect as a result of the error are corrected by journal entry. If retained earnings is one of the incorrect accounts, the correction is reported as a prior period adjustment to the beginning balance in the statement of shareholders’ equity. In addition, a disclosure note is needed to describe the nature of the error and the impact of its correction on net income, income before extraordinary items, and earnings per share.




Question 11–18 Impairment of the value of property, plant, and equipment and intangible assets

results when there has been a significant decline in value below book value. For property, plant, and equipment and intangible assets with finite useful lives, GAAP requires an entity to perform a recoverability test to determine if the undiscounted sum of estimated future cash flows from an asset is less than the asset’s book value. If there is indication of an impairment, then the loss is measured and recognized as the amount by which the book value exceeds the fair value of the asset or group of assets when the fair value is readily determinable. If fair value is not determinable, it must be estimated. One method of estimating fair value is to compute the present value of estimated future cash flows from the asset or group of assets.

For intangible assets with indefinite useful lives other than goodwill, if book value exceeds fair value, an impairment loss is recognized for the differences. For goodwill, an impairment loss is indicated if the fair value of the reporting unit is less than its book value. A goodwill impairment loss is measured as the excess of book value of goodwill over its “implied” fair value.

For property, plant, and equipment and intangible assets held for sale, if book value exceeds fair value, an impairment loss is recognized for the difference.

Question 11–19 Repairs and maintenance are expenditures made to maintain a given level of

benefits provided by the asset and do not increase future benefits. Expenditures for these activities should be expensed in the period incurred.

Additions involve adding a new major component to an existing asset. These expenditures usually are capitalized.

Improvements are expenditures for the replacement of a major component of plant and equipment. The costs of improvements usually are capitalized.

Rearrangements are expenditures to restructure plant and equipment without addition, replacement, or improvement. The objective is to create a new capability for the asset and not necessarily to extend useful life. The costs of material rearrangements should be capitalized if they clearly increase future benefits.



Answers to Questions (concluded)



Brief Exercise 11–1 Depreciation is a process of cost allocation, not valuation. Koeplin should not

record depreciation of $18,000 for year one of the machine’s life. Instead, it should distribute the cost of the asset, less any anticipated residual value, over the estimated useful life in a systematic and rational manner that attempts to match revenues with the use of the asset, not the periodic decline in its value.

BRIEF EXERCISES



Brief Exercise 11–2

a. Straight-line: $30,000 – 2,000

= $7,000 per year 4 years

b. Sum-of-the-years’ digits: Sum-of-the-digits is ([4 (4 + 1)] ÷ 2) = 10

2018 $28,000 × 4/10 = $11,200

2019 $28,000 × 3/10 = $ 8,400

c. Double-declining balance: Straight-line rate is 25% (1 ÷ 4 years) × 2 = 50% DDB rate

2018 $30,000 × 50% = $15,000

2019 ($30,000 – 15,000) × 50% = $ 7,500

d. Units-of-production: $30,000 – 2,000 = $2.80 per unit depreciation rate 10,000 hours

2018 2,200 hours × $2.80 = $6,160

2019 3,000 hours × $2.80 = $8,400




a. Straight-line: $30,000 – 2,000

= $7,000 per year 4 years

2018 $7,000 × 9/12 = $5,250

2019 $7,000 × 12/12 = $7,000

b. Sum-of-the-years’ digits: Sum-of-the-digits is ([4 (4 + 1)] ÷ 2) = 10

2018 $28,000 × 4/10 × 9/12 = $8,400 2019 $28,000 × 4/10 × 3/12 = $2,800 + $28,000 × 3/10 × 9/12 = 6,300

$9,100

c. Double-declining balance: Straight-line rate is 25% (1 ÷ 4 years) × 2 = 50% DDB rate

2018 $30,000 × 50% × 9/12 = $11,250 2019 $30,000 × 50% × 3/12 = $ 3,750 + ($30,000 – 15,000) × 50% × 9/12 = 5,625

$ 9,375 or,

2019 ($30,000 – 11,250) × 50% = $ 9,375



Brief Exercise 11–4 Consideration received $16,000 Less book value: Cost $80,000 Accum. depreciation (71,000) 9,000

Gain on sale of equipment $ 7,000

Journal entry (not required):

Cash ................................................................................. 16,000 Accumulated depreciation (account balance) .................... 71,000 Gain (difference) ............................................................ 7,000 Equipment (account balance) .......................................... 80,000


Cash ................................................................................. 3,000 Accumulated depreciation—tractor (account balance) ...... 26,000 Loss on sale of tractor (difference) .................................... 1,000 Tractor (account balance) ................................................ 30,000

Cash ................................................................................. 10,000 Accumulated depreciation—tractor (account balance) ...... 26,000 Tractor (account balance) ................................................ 30,000 Gain on sale of tractor (difference) ............................... 6,000

Notice that no matter how much the asset is sold for, the same amounts are recorded as the asset and its accumulated depreciation are removed from the books.



Brief Exercise 11–6 To record the sale of the patent.

July 15, 2018 Cash ................................................................................ 750,000 Patent (account balance) ................................................. 120,000 Gain on sale of patent (difference) ................................ 630,000

Consideration received $750,000 Less book value: 120,000

Gain on sale of patent $630,000

To record the sale of equipment.

July 15, 2018 Cash ................................................................................ 325,000 Accumulated depreciation – equipment (account balance) 150,000 Loss on sale of equipment (difference) ................................. 75,000 Equipment (account balance) ........................................ 550,000

Consideration received $325,000 Less book value: Cost $550,000 Accum. depreciation (150,000) 400,000

Loss on sale of equipment $(75,000)




$8,250,000 Depletion per foot = = $2.75 per foot 3,000,000 cubic feet

Year 1 depletion = $2.75 × 700,000 feet = $1,925,000

Year 2 depletion = $2.75 × 800,000 feet = $2,200,000



Brief Exercise 11–9 Expenses for the year include: Amortization of the patent † = $400,000 Amortization of the developed technology* = 300,000

Total $700,000 Goodwill is not amortized. In-process research and development is not

amortized. †Amortization of the patent:

($4,000,000 5) × 6/12 = $400,000 *Amortization of the developed technology:

($3,000,000 5) × 6/12 = $300,000



Brief Exercise 11–12 If a material error is discovered in an accounting period subsequent to the period

in which the error is made, previous years’ financial statements that were incorrect as a result of the error are retrospectively restated to reflect the correction. Any account balances that are incorrect as a result of the error are corrected by journal entry. If retained earnings is one of the incorrect accounts, the correction is reported as a prior period adjustment to the beginning balance in the statement of shareholders’ equity. In addition, a disclosure note is needed to describe the nature of the error and the impact of its correction on net income, income before extraordinary items, and earnings per share.

In this case, depreciation of $32,000 should have been $320,000 ($8,000,000 25 years). Therefore, 2016 income before tax is overstated by $288,000 ($320,000 – 32,000) and accumulated depreciation is understated by the same amount. The following journal entry is needed in 2018 to record the error correction (ignoring income tax):

Retained earnings ............................................................ 288,000 Accumulated depreciation ......................................... 288,000 Depreciation for 2018 would be $320,000.


Recoverability test: Because the undiscounted sum of future cash flows of $28 million exceeds book value of $26.5 million, there is no impairment loss to measure.


Recoverability test: Because the undiscounted sum of future cash flows of $24 million is less than book value of $26.5 million, there is an impairment loss.

Measurement: The impairment loss is calculated as follows:

Book value $26.5 million Fair value 21.0 million

Impairment loss $ 5.5 million




Recoverability test: Because the book value of SCC’s net assets of $42 million exceeds the fair value of $40 million, an impairment loss is indicated.

Measurement:

Determination of implied fair value of goodwill: Fair value of SCC $40 million Less: Fair value of SCC’s assets (excluding goodwill) 31 million Implied fair value of goodwill $ 9 million

Measurement of impairment loss: Book value of goodwill $15 million Less: Implied fair value of goodwill 9 million

Impairment loss $ 6 million


Recoverability test: Because the book value of SCC’s net assets of $42 million is less than the fair value of $44 million, an impairment loss is not indicated.




Annual maintenance on machinery, $5,400—This is an example of normal repairs and maintenance. Future benefits are not increased; therefore, the expenditure should be expensed in the period incurred.

Remodeling of offices, $22,000—This is an example of an improvement. The cost of the remodeling should be capitalized and depreciated, either by (1) substitution, (2) direct capitalization of the cost, or (3) a reduction of accumulated depreciation.

Rearrangement of the shipping and receiving area, $35,000—This is an example of a rearrangement. Because the rearrangement increased productivity, the cost should be capitalized and depreciated.

Addition of a security system, $25,000—This is an example of an addition. The cost of the security system should be capitalized and depreciated.



Exercise 11–1 SIN SUMA DE LOS DIGITOS 1. Straight-line:

$33,000 – 3,000 = $6,000 per year 5 years

2. Sum-of-the-years’ digits:

Year

Depreciable

Base

X

Depreciation

Rate per Year

=

Depreciation 2018 $30,000

5

15 $10,000

2019 30,000 4

15 8,000

2020 30,000 3

15 6,000

2021 30,000 2

15 4,000

2022 30,000 1

15 2,000

Total $30,000

EXERCISES



Exercise 11–1 (concluded)

3. Double-declining balance:

Straight-line rate of 20% (1 ÷ 5 years) × 2 = 40% DDB rate.

Year

Book Value

Beginning

of Year X

Depreciation

Rate per

Year =

Depreciation

Book Value

End of Year 2018 $33,000 40% $ 13,200 $19,800 2019 19,800 40% 7,920 11,880 2020 11,880 40% 4,752 7,128 2021 7,128 40% 2,851 4,277 2022 4,277 * 1,277 * 3,000 Total $30,000

* Amount necessary to reduce book value to residual value

4. Units-of-production: $33,000 – 3,000 = $0.30 per mile depreciation rate 100,000 miles

Year

Actual

Miles

Driven X

Depreciation

Rate per

Mile =

Depreciation

Book Value

End of

Year 2018 22,000 $0.30 $6,600 $26,400 2019 24,000 0.30 7,200 19,200 2020 15,000 0.30 4,500 14,700 2021 20,000 0.30 6,000 8,700 2022 21,000 * 5,700 * 3,000 Totals 102,000 $30,000 * Amount necessary to reduce book value to residual value



Exercise 11–4 Building depreciation: $5,000,000 – 200,000 = $160,000 per year 30 years

Building addition depreciation: Remaining useful life from June 30, 2018, is 27.5 years. $1,650,000 = $60,000 per year 27.5 years

2018 $60,000 × 6/12 = $30,000

2019 $60,000 × 12/12 = $60,000



Exercise 11–5 Asset A: Straight-line rate is 20% (1 ÷ 5 years) × 2 = 40% DDB rate

$24,000 = $60,000 = Book value at the beginning of year 2 .40

Cost – (Cost × 40%) = $60,000 60% × Cost = $60,000

Cost = $100,000

Asset B: Sum-of-the-years’ digits is 36 {[8 (8 + 1)]÷2}

($40,000 – residual) × 7/36 = $7,000

$280,000 – 7 × residual -------------------------- = $7,000 36

$280,000 – 7 × residual = $252,000

7 × residual = $28,000

Residual = $4,000

Asset C: $65,000 – 5,000 = $6,000 Life

Life = 10 years

Asset D: $230,000 – 10,000 = $220,000 depreciable base $220,000 ÷ 10 years = $22,000 per year

Method used is straight line.

Asset E: Straight-line rate is 12.5% (1 ÷ 8 years) × 1.5 = 18.75% rate

Year 1 $200,000 × 18.75% = $37,500

Year 2 ($200,000 – 37,500) × 18.75% = $30,469



Exercise 11–7 Building depreciation: $8,000,000* – 800,000** = $240,000 per year 30 years *$12,000,000 × 2/3 **$8,000,000 × 10%

2018: $240,000 × 9/12 = $180,000 2019: $240,000

Furniture and fixtures depreciation: 1/10 or 10% (the straight-line rate) × 2 = 20% DDB rate

2018: $1,200,000 × 20% × 9/12 = $180,000 2019: $1,200,000 × 20% × 3/12 = $60,000 + ($1,200,000 – 240,000) × 20% × 9/12 = 144,000

$204,000 or,

2019: ($1,200,000 – 180,000) × 20% = $204,000

Office equipment depreciation: 1/5 or 20% (the straight-line rate) × 2 = 40% DDB rate

2018: $700,000 × 40% × 9/12 = $210,000 2019: $700,000 × 40% × 3/12 = $ 70,000 + ($700,000 – 280,000) × 40% × 9/12 = 126,000 $196,000 or,

2019: ($700,000 – 210,000) × 40% = $196,000





Exercise 11–10

Requirement 1

Cash ................................................................................ 210,000 Accumulated depreciation—equipment (account balance) 170,000* Loss on sale of equipment (difference) ............................. 20,000 Equipment (account balance) .......................................... 400,000 * Depreciation per unit = ($400,000 – $50,000) ÷ 700,000 units = $0.50.

Total accumulated depreciation 2016-2018 = 340,000 units × $0.50 = $170,000.

Requirement 2

Cash ................................................................................ 245,000 Accumulated depreciation—equipment (account balance) 170,000 Equipment (account balance) ......................................... 400,000 Gain on sale of equipment (difference) ........................ 15,000



Exercise 11–11

Depreciation = ($126,000 − $30,000) ÷ 8 years = $12,000/year or $1,000/month

Requirement 1 To update depreciation in 2018; 2 months of service to date of disposal.

Depreciation expense ..................................................... 2,000 Accumulated depreciation .......................................... 2,000

Requirement 2 To record the sale of the truck.

Cash ................................................................................ 58,000 Loss on sale of truck (difference) ...................................... 12,000 Accumulated Depreciation (account balance) ................... 56,000* Truck (account balance) .................................................. 126,000 * July 1, 2013 to March 1, 2018 = 56 months.

Total accumulated depreciation = 56 months × $1,000 = $56,000.

Alternatively, by year:

$6,000 + $12,000 + $12,000 + $12,000 + $12,000 + $2,000 = $56,000.

Requirement 3 To record the sale of the truck.

Cash ................................................................................ 80,000 Accumulated Depreciation (account balance) ................... 56,000* Truck (account balance) .................................................. 126,000 Gain on sale of truck (difference) .................................. 10,000

* July 1, 2013 to March 1, 2018 = 56 months.

Total accumulated depreciation = 56 months × $1,000 = $56,000.

Alternatively, by year:

$6,000 + $12,000 + $12,000 + $12,000 + $12,000 + $2,000 = $56,000.



Exercise 11–14

Requirement 1

Cost of the equipment: Purchase price $154,000 Freight charges 2,000 Installation charges 4,000 $160,000 Straight-line rate of 12.5% (1 ÷ 8 years) × 2 = 25% DDB rate.

Year

Book Value

Beginning

of Year

X

Depreciation

Rate per Year

=

Depreciation

Book Value

End of Year 2018 $160,000 25% $ 40,000 $120,000 2019 120,000 25% 30,000 90,000 2020 90,000 25% 22,500 67,500 2021 67,500 25% 16,875 50,625 2022 50,625 * 5,000 45,625 2023 45,625 * 5,000 40,625 2024 40,625 * 5,000 35,625 2025 35,625 * 5,000 30,625 Total $129,375

* Switch to straight line in 2022:

($50,625 – 30,625) / 4 years = $5,000 / year

Requirement 2 Since there is a policy to switch to straight-line depreciation halfway through an

asset’s life, this is not treated as a change in accounting method that requires disclosure of justification for a change in method. For plant and equipment used in the manufacture of a product, depreciation is a product cost and is included in the cost of inventory. Eventually, when the product is sold, depreciation will be included in cost of goods sold.



Exercise 11–15

Requirement 1 $4,500,000 Depletion per ton = = $5.00 per ton 900,000 tons

2018 depletion = $5.00 × 240,000 tons = $1,200,000

Requirement 2 Depletion is part of product cost and is included in the cost of the inventory of

coal, just as the depreciation on manufacturing equipment is included in inventory cost. The depletion is then included in cost of goods sold in the income statement when the coal is sold.

Exercise 11–16 Timber tract: $3,200,000 – 600,000 = $0.52 per board foot 5,000,000 board feet

500,000 × $0.52 = $260,000 depletion Logging roads:

$240,000 5,000,000 board feet = $0.048 per board foot

500,000 × $.048 = $24,000 depreciation



Exercise 11–17

Requirement 1

Cost of copper mine: Mining site $1,000,000 Development costs 600,000 Restoration costs 303,939 †

$1,903,939 † $300,000 × 25% = $ 75,000 400,000 × 40% = 160,000 600,000 × 35% = 210,000 $445,000 × .68301* = $303,939

*Present value of $1, n = 4, i = 10% (Table 2)

Depletion: $1,903,939 Depletion per pound = = $0.1904 per pound 10,000,000 pounds

2018 depletion = $0.1904 × 1,600,000 pounds = $304,640

2019 depletion = $0.1904 × 3,000,000 pounds = $571,200

Depreciation: $120,000 – 20,000 Depreciation per pound = = $0.01 per pound 10,000,000 pounds

2018 depreciation = $0.01 × 1,600,000 pounds = $16,000

2019 depreciation = $0.01 × 3,000,000 pounds = $30,000

Requirement 2 Depletion of natural resources and depreciation of assets used in the extraction

of natural resources are part of product cost and are included in the cost of the inventory of copper, just as the depreciation on manufacturing equipment is included in inventory cost. The depletion and depreciation are then included in cost of goods sold in the income statement when the copper is sold.



Exercise 11–18

Requirement 1

a. To record the purchase of a patent.

January 1, 2016 Patent ............................................................................... 700,000 Cash ............................................................................. 700,000

To record amortization on the patent.

December 31, 2016 and 2017 Amortization expense ($700,000 ÷ 10 years) ...................... 70,000 Patent ........................................................................... 70,000

b. To record the purchase of a franchise.

2018 Franchise ......................................................................... 500,000 Cash ............................................................................. 500,000

c. To record research and development expenses.

2018 Research and development expense ............................... 380,000 Cash ............................................................................. 380,000




2018 Year-end adjusting entries

Patent: To record amortization on the patent after change in useful life.

December 31, 2018 Amortization expense (determined below) ......................... 112,000 Patent .......................................................................... 112,000

Calculation of annual amortization after the estimate change: ($ in thousands)

$700 Cost $70 Previous annual amortization ($700 ÷ 10 years) × 2 years 140 Amortization to date (2016–2017) 560 Unamortized cost (balance in the patent account) ÷ 5 Estimated remaining life $112 New annual amortization

Franchise: To record amortization of franchise.

December 31, 2018 Amortization expense ($500,000 ÷ 10 years) ...................... 50,000 Franchise ..................................................................... 50,000

Requirement 2

Intangible assets: Patent $448,000 [1] Franchise 450,000 [2] Total intangibles $898,000 [1] $560,000 – 112,000 [2] $500,000 – 50,000



Exercise 11–19 To record the purchase of the patent.

January 2, 2018 Patent ............................................................................... 500,000 Cash ............................................................................. 500,000

To record amortization of the patent for the year 2018.

Amortization expense ($500,000 ÷ 8 years) ........................ 62,500 Patent ........................................................................... 62,500


Amortization expense ($500,000 ÷ 8 years) ........................ 62,500 Patent ........................................................................... 62,500

To record costs of successfully defending the patent infringement suit.

January, 2020 Patent ............................................................................... 45,000 Cash ............................................................................. 45,000





Amortization expense (determined below) ......................... 70,000 Patent .......................................................................... 70,000

Calculation of revised annual amortization: ($ in thousands) $500 Cost $62.5 Previous annual amortization ($500 ÷ 8 years) × 2 years 125 Amortization to date (2018–2019) 375 Unamortized cost (balance in the patent account)

45 Add legal fees of successful defense 420 New unamortized cost ÷ 6 Estimated remaining life (8 years – 2 years) $ 70 New annual amortization



Exercise 11–25

Requirement 1

Analysis:

Correct Incorrect (Should Have Been Recorded) (As Recorded)

2015 Equipment 350,000 Expense 350,000 Cash 350,000 Cash 350,000 2015 Expense 70,000 Depreciation entry omitted Accum. deprec. 70,000

2016 Expense 70,000 Depreciation entry omitted Accum. deprec. 70,000 2017 Expense 70,000 Depreciation entry omitted Accum. deprec. 70,000 During the three-year period, depreciation expense was understated by $210,000, but other expenses were overstated by $350,000, so net income during the period was understated by $140,000, which means retained earnings is currently understated by that amount. During the three-year period, accumulated depreciation was understated, and continues to be understated by $210,000.

To correct incorrect accounts Equipment .......................................................... 350,000 Accumulated depreciation ($70,000 × 3 years) .. 210,000 Retained earnings ($350,000 – 210,000) ............. 140,000

Requirement 2

Correcting entry: Assuming that the equipment had been disposed of, no correcting entry would

be required because, after five years, the accounts would show appropriate balances.



Exercise 11–26

Requirement 1

Recoverability test: Because the undiscounted sum of future cash flows of $4.0 million is less than book value of $6.5 million, there is an impairment loss.

Measurement: The impairment loss is calculated as follows:

Book value $6.5 million Fair value 3.5 million

Impairment loss $3.0 million

Requirement 2 Because the undiscounted sum of future cash flows of $6.8 million exceeds book

value of $6.5 million, there is no impairment loss.



Exercise 11–29

Requirement 1

Recoverability test:

An impairment loss is indicated because the estimated undiscounted sum of future cash flows of $15 million is less than the book value of $18.3 million.

Measurement: The amount of the loss to be reported is calculated using the estimated fair value

rather than the undiscounted future cash flows:

Book value $18,300,000 Estimated fair value 11,000,000

Impairment loss $ 7,300,000

Requirement 2 The loss would appear in the income statement along with other operating

expenses.

Requirement 3

Loss on impairment ............................................ 7,300,000 Accumulated depreciation ................................. 14,200,000 Plant assets ...................................................... 21,500,000

Requirement 4

Recoverability test: An impairment loss is indicated because the estimated undiscounted sum of

future cash flows of $12 million is less than the book value of $18.3 million.

Measurement: The amount of the loss to be reported is calculated using the estimated fair value

rather than the undiscounted future cash flows:

Book value $18,300,000 Estimated fair value 11,000,000

Impairment loss $ 7,300,000



Requirement 5

Recoverability test: Because the estimated undiscounted sum of future cash flows of $19 million

exceeds the book value of $18.3 million, no impairment loss is indicated.



Exercise 11–30

Requirement 1

Determination of implied fair value of goodwill: Fair value of Centerpoint, Inc. $220 million Fair value of Centerpoint’s net assets (excluding goodwill) 200 million Implied fair value of goodwill $ 20 million

Measurement of impairment loss: Book value of goodwill $50 million Implied fair value of goodwill 20 million

Impairment loss $30 million

Requirement 2 Because the fair value of the reporting unit, $270 million, exceeds book value,

$250 million, there is no impairment loss.



Exercise 11–32

Requirement 1

Calculation of goodwill:

Consideration exchanged $420 million Less fair value of net assets: Assets $512 million Less: Liabilities assumed (150) million (362) million

Goodwill $ 58 million

Requirement 2

Recoverability test: Because the book value of the net assets ($410 million) exceeds fair value

($400 million), an impairment loss is indicated.

Measurement:

Determination of implied fair value of goodwill: Fair value of Harman, Inc. $400 million Fair value of Harman’s net assets (excluding goodwill) 370 million Implied fair value of goodwill $ 30 million

Measurement of impairment loss: Book value of goodwill (determined in requirement 1) $ 58 million Implied fair value of goodwill 30 million

Impairment loss $ 28 million

Requirement 3 Entry to record the impairment loss: ($ in millions)

Loss on impairment of goodwill ....................... 28 Goodwill ........................................................ 28



Exercise 11–35 1. To record the replacement of the heating system.

Accumulated depreciation—building ............................. 250,000 Cash ............................................................................. 250,000

2. To record the addition to the building.

Building ........................................................................... 750,000 Cash ............................................................................. 750,000

3. To expense annual maintenance costs.

Maintenance expense ...................................................... 14,000 Cash ............................................................................. 14,000

4. To capitalize rearrangement costs.

Equipment ....................................................................... 50,000 Cash ............................................................................. 50,000



Problem 11–2

Requirement 1

CORD COMPANY

Analysis of Changes in Plant Assets

For the Year Ending December 31, 2018

Balance Balance

12/31/17 Increase Decrease 12/31/18

Land $ 175,000 $ 312,500 [1] $ -- $ 487,500

Land improvements -- 192,000 -- 192,000

Buildings 1,500,000 937,500 [1] -- 2,437,500

Machinery and equipment 1,125,000 385,000 [2] 17,000 1,493,000

Automobiles and trucks 172,000 12,500 24,000 160,500

Leasehold improvements 216,000 -- -- 216,000

$3,188,000 $1,839,500 $41,000 $4,986,500

Explanations of Amounts:

[1] Plant facility acquired from King 1/6/2018—allocation to Land and Building: Fair value—25,000 shares of Cord common stock at $50 per share fair value $1,250,000 Allocation in proportion to appraised values at date of exchange:

% of

Amount Total Land $187,500 25 Building 562,500 75 $750,000 100 Land $1,250,000 × 25% = $ 312,500 Building $1,250,000 × 75% = 937,500 $1,250,000

[2] Machinery and equipment purchased 7/1/2018: Invoice cost $325,000 Delivery cost 10,000 Installation cost 50,000 Total acquisition cost $385,000



Problem 11–2 (continued)

Requirement 2

CORD COMPANY

Depreciation and Amortization Expense

For the Year Ended December 31, 2018

Land Improvements: Cost $192,000 Straight-line rate (1 ÷ 12 years) x 8 1/3% Annual depreciation 16,000 Depreciation on land improvements for 2018: (3/25 to 12/31/2018) × 3/4 $ 12,000

Buildings: Book value, 1/1/2018 ($1,500,000 – 328,900) $1,171,100 Building acquired 1/6/2018 937,500 Total amount subject to depreciation 2,108,600 150% declining balance rate: (1 ÷ 25 years = 4% × 1.5) × 6% $ 126,516

Machinery and equipment: Balance, 1/1/2018 $1,125,000 Straight-line rate (1 ÷ 10 years) × 10% 112,500

Purchased on 7/1/2018 385,000 Depreciation for one-half year × 5% 19,250 Depreciation on machinery and equipment for 2018 $ 131,750

Automobiles and trucks: Book value, 1/1/2018 ($172,000 – 100,325) $71,675 Deduct 1/1/2018 book value of truck sold on 9/30 ($9,100 + 2,650) (11,750) Amount subject to depreciation 59,925 150% declining balance rate: (1 ÷ 5 years = 20% × 1.5) × 30% 17,978

Automobile purchased 8/30/2018 12,500 Depreciation for 2018 (30% × 4/12) × 10% 1,250 Truck sold on 9/30/2018 – depreciation (given) 2,650 Depreciation on automobiles and trucks $ 21,878



Problem 11–2 (concluded)

Leasehold improvements: Book value, 1/1/2018 ($216,000 – 108,000) $108,000 Amortization period (1/1/2018 to 12/31/2022) ÷ 5 years Amortization of leasehold improvements for 2018 $ 21,600

Total depreciation and amortization expense for 2018 $313,744

Note: the amortization period was originally over the shorter of the asset life (8 years) or the lease (6 years). Three years have passed. The lease will end in 2024 but the life will end in 2022. The new amortization period is thus 5 years.



Problem 11–3

PELL CORPORATION

Depreciation

For the Year Ended December 31, 2018

Land improvements:* Cost $ 180,000 Straight-line rate (1 ÷ 15 years) × 6 2/3% $ 12,000

Building: Book value 12/31/2017 ($1,500,000 – 350,000) $1,150,000 150% declining balance rate: (1 ÷ 20 years = 5% × 1.5) × 7.5% $ 86,250 Building donated on 3/31/2018 $17,000 150% declining balance rate: (1 ÷ 20 years = 5% × 1.5 × 9/12) × 5.625% $ 956.25 Total depreciation on buildings $87,206.25

Machinery and Equipment: Balance, 12/31/2017 $1,158,000 Straight-line rate (1 ÷ 10 years) × 10% 115,800

Purchased 1/2/2018 287,000 Depreciation × 10% 28,700 Total depreciation on machinery and equipment $144,500

Automobiles: Book value on 12/31/2017 ($150,000 – 112,000) $38,000 150% declining balance rate: (1 ÷ 3 years = 33.333% × 1.5) × 50% $ 19,000

Total depreciation for 2018 $262,706.25

*The repaving of the parking lots is considered a repair that doesn’t provide future benefits beyond those originally anticipated.



Problem 11–4 1. Depreciation for 2016 and 2017.

December 31, 2016 Depreciation expense ($48,000 ÷ 8 years × 9/12) ................. 4,500

Accumulated depreciation—equipment ..................... 4,500

December 31, 2017 Depreciation expense ($48,000 ÷ 8 years).......................... 6,000 Accumulated depreciation—equipment ..................... 6,000

2. The year 2018 expenditure.

January 4, 2018 Repair and maintenance expense ................................... 2,000 Equipment ....................................................................... 10,350 Cash ............................................................................ 12,350

3. Depreciation for the year 2018.

December 31, 2018 Depreciation expense (determined below) ......................... 5,800 Accumulated depreciation—equipment ..................... 5,800

Calculation of annual depreciation after the estimate change:

$ 48,000 Cost 10,500 Depreciation to date ($4,500 + 6,000) 37,500 Undepreciated cost 10,350 Asset addition 47,850 New depreciable base ÷ 8 1/4 Estimated remaining life (10 years – 1 3/4 years)

$ 5,800 New annual depreciation



Problem 11–9

Requirement 1

Machine 101: $70,000 – 7,000 = $6,300 per year × 3 years = $ 18,900 10 years

Machine 102:

$80,000 – 8,000 = $9,000 per year × 1.5 years = 13,500 8 years

Machine 103: $30,000 – 3,000 = $3,000 per year × 4/12 = 1,000 9 years

Accumulated depreciation, 12/31/2017 $33,400

Requirement 2 To record depreciation on machine 102 up to the date of sale.

March 31, 2018 Depreciation expense ($9,000 per year × 3/12) .................... 2,250

Accumulated depreciation—equipment ..................... 2,250



Problem 11–9 (continued)

Requirement 3 Consideration received $52,500 Less book value on 3/31/2018: 64,250*

Loss on sale of machine 102 $11,750 * Cost $80,000 Less accumulated depreciation: Depreciation through 12/31/2017 $13,500 Depreciation from 1/1/2018 to 3/31/2018 ($9,000 × 3/12) 2,250 15,750 64,250

Requirement 4 To record sale of equipment.

March 31, 2018 Cash ................................................................................ 52,500 Accumulated depreciation ($13,500 + 2,250) .................... 15,750 Loss on sale of equipment (determined below) .................. 11,750 Equipment ................................................................... 80,000



Problem 11–9 (concluded)

Requirement 5

Building: Useful life of the building:

$200,000 = $40,000 in depreciation per year 5 years (2013–2017)

$840,000 – $40,000 = 20-year useful life $40,000

To record depreciation on the building.

Depreciation expense [($840,000 – 40,000) ÷ 20 years] ........ 40,000 Accumulated depreciation—building ......................... 40,000

To record depreciation on the equipment.

Depreciation expense (determined below) .......................... 15,775 Accumulated depreciation—equipment ..................... 15,775

Equipment: Machine 103 (determined above) $ 3,000 Machine 101: Cost $70,000 Less: Accumulated depreciation 18,900 Book value, 12/31/2017 51,100 Revised remaining life (7 years – 3 years) ÷ 4 years 12,775 $15,775

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Chapter 11 Property, Plant, and Equipment and Intangible Assets…contabilidad.uprrp.edu/wp-content/uploads/2018/04/Spiceland_9e_CH... · allocating the cost of property, plant, and